5 Tactics I Used to Grow My Portfolio 70% in 1 Year and Outperform Markets Over the Last 7 Years
In September of 2023 I published an article, “10 Rules that Helped me Outperform 90% of Hedge Funds for the Last 6 Years” which illustrated the strategies I deployed to garner outsized returns from my personal investing strategies. In the article I open sourced my investment track record from 2016 — Early 2023 (all I had records available for) to substantiate the investment tactics I was propagating.
After releasing that article I received an outpour of positive feedback and additional questions about what I believe will happen next and what companies I think people should invest in.
I should add a disclaimer that I do not believe that anyone knows what markets will do, but regardless I have decided to compile my ideas based on the recent run-up in public equities.
Before I go any further — and in the spirit of transparency — below are my recent investment results since publishing my last article:
1 Year Portfolio Performance vs. S&P-500, NASDAQ and DOW:
My Portfolio: +70.39%
NASDAQ Returns (same period): +37.61%
Dow Jones Returns (same period): +22.34%
S&P 500 Returns (same period): +31.07%
YTD Portfolio Performance vs. S&P-500, NASDAQ and DOW:
My Portfolio: +17.04%
NASDAQ Returns (same period): +6.62%
Dow Jones Returns (same period): +3.42%
S&P 500 Returns (same period): +7.63%
Why did my portfolio grow so much in the last year?
During the market pullback in 2022, I noticed some interesting data points, which drove me to invest in specific securities that had become undervalued by late 2022 and early 2023. Below are 5 of the data points that contributed to my thesis that certain aspects of the market had become undervalued.
1.Unsubstantiated Pessimism
In 2022 pessimism reached an all time high. The S&P 500 dropped by nearly 25% from December 31st 2021 — September 30th 2022 and the NASDAQ Composite declined 35% during approximately the same period. For context the S&P 500’s performance in 2022 was the index’s fourth-worst performance since the composite’s inception in 1957 when it first decided to include 500 companies.
In every cyclical market downturn there has been a beginning, a middle, and an end to that downturn. As the market pullback started at the end of 2021, I began to track and compare the duration of the current downturn against past market downturns. Analyzing the different peak to troughs of other economic downturns allowed me to ascertain an approximation of the best buying period.
Below are some references I used to compare and contrast the phase of the downturn we were in.
By leveraging time and historical data I was able to identify a compelling investment “window” during the market pullback of EOY 2021–2023. This investment “window” allowed me to set a baseline and deploy capital with confidence.
2.Historical Data Didn’t Substantiate Market Pessimism
Since 1957, the S&P 500 has only fallen more than it did in 2022 three times: 1974, 2002, and 2008. However in all 3 of the aforementioned periods, the S&P 500 index recovered in the year immediately following those pullbacks. In 1975, 2003 and 2009 the S&P 500 generated an average return of 27.1%. Going even further back in time, from 1928–2022 the S&P 500 Index has only dropped more than 2 years in a row 4 times (out of 24 pullbacks) and since 1957 there has only been two occasions in which the S&P 500 fell for two (or more) consecutive years — 1973 to 1974 and 2000 to 2002.
The trends highlighted from 1928–2022 signify that the % likelihood of a back to back annual pullback in the S&P 500 index was statistically 16.67% in early 2023. The primary drivers of the most recent market pullback were largely triggered by higher interest rates and the fear of rampant inflation. Both of these circumstances were nowhere near as dramatic as prior economic downturns, which had caused similar % declines in public markets.
The above anecdotal data points were a positive buy signal that overall market pessimism may have been overblown and that statistically a rebound was likely to occur.
3.History Showed Inflationary Risks Were Passing
When reviewing analogs, more specifically, inflationary periods dating back to 1914, it was apparent that — with the exception of spikes in the mid 70’s through the early 80’s — inflationary periods are typically transient and don’t last more than 2–3 years. Since World War II, there have been several periods in which inflation — as measured by CPI — was 5 percent or higher. This occurred in 1946–48, 1950–51, 1969–71 and 1973–82 and recently in 2021–2024. For context this is one of the longest inflationary periods since 1973–1982.
Again by early 2023 we had already been in the inflationary cycle for around 2 years and thus this was another signal that markets could be poised to rebound. Historically, there is no doubt that inflation can be sticky and linger, but another variable to consider is that our economy was much younger in earlier inflationary periods and the Federal Reserve was less resourced with modern economic case studies to guide policy decisions. Unlike prior inflationary periods, the Federal Reserve has more meaningful case studies related to the cause and effect of raising and lowering interest rates than prior administrations. One immediate example is the 1980–1982 recession, which was driven by Paul Volcker’s aggressive, but necessary rate hikes. Though the 1970’s oil crisis played a role it was a lack of gumption and fiscal discipline that caused inflation to reappear. When Paul Volcker’s administration raised the prime interest rate to 21.5% there were few modern economic analogs of what the results would be. Unlike Volcker, Jerome Powell and his peers now have historical precedence as to what could happen with inflation if a loose economic policy prevails in the digital era.
4.The historical market migration from the S&P-500 stocks into NASDAQ stocks masked the true impact of EOY 2021-2023's broader market pullback
The S&P 500 Index has historically been the best way to track broader market trends as it is connected to a larger basket of national enterprises. By comparison, the NASDAQ-100 Index has historically been tethered to the performance of tech based companies.
Since 2008, we have seen a paradigm shift across countless industries where technology has moved from the background to the foreground of corporate evolution. This paradigm shift is driven by technological innovations, which are being embedded into a range of companies across varying sectors. Technological adaptation by newer companies — and the disruptive impacts it often produces— has to some extent made all companies “tech” companies.
As a thought exercise think about industries you interact with daily and think about how most industries have been disrupted and transformed into “tech companies” that are NASDAQ listed over the last 2 decades:
The result of the above trends are exemplified by the NASDAQ-100’s performance vis a vi the S&P-500’s performance. Since 2008, the NASDAQ-100 has outperformed the S&P-500 by a wide margin. Many attribute the NASDAQ’s outperformance to a short term trend. Though I agree that the NASDAQ-100’s performance can not continue indefinitely, I do caution that unlike other bubbles and historical trends the NASDAQ-100 does represent a more tangible investment thesis. This investment thesis can be surmised in the view that technological advancement will continue, thus productivity will accelerate, and economic growth will follow. If you believe in the aforementioned thesis then betting against the NASDAQ-100 is somewhat akin to betting against the notion that innovation and technological advancements will continue.
From an investment perspective understanding the 2021–2023 pullback in relation to the NASDAQ’s largest and most productive companies is essential. The NASDAQ’s dramatic -35% decline, while likely merited from frothy 2021 peaks, may have represented a larger overall % of the broader economic decline than previous market pullbacks. However, if the NASDAQ and it’s constituents have come to represent a more sizable and fundamentally sound segment of the market compared to prior recessions and pullbacks, then the volatility in certain cashflow generative securities within the NASDAQ-100 may have not been justified. These sharp declines in specific securities presented unique asymmetrical investment opportunities, which could be leveraged to produce outsized market returns.
Up until the last 15 years or so technology companies and the NASDAQ were perceived as a segment of the market, rather than the bulk of the market. When we look at markets today technology now plays a larger role in the longitudinal success of most if not all securities.
At the end of 2022 and early in 2023, I built positions in cashflow generative equities that had been overly sold due to their association with the broader market rotation out of the NASDAQ. As an example, META was at one point trading at 11x cashflow, had a 2:1 assets to liabilities ratio, and a user base of more than 3.98 billion humans, which is close to half the world’s population. Meta was effectively the largest communications and media company in the world and it had become severely undervalued. With such a substantial user base and 20+ years of operating excellence, it was difficult to believe that Meta couldn’t improve their operating margins and or alternatively find a way to drive shareholder value. At the end of 2022, I began to aggressively build a position in Meta and a small basket of other cash generative securities within the NASDAQ.
5.The destruction of other — newer — asset classes in the EOY 2021–2023's broader market pullback were not felt as severely through traditional financial markets and indexes.
During COVID-19 investors poured into speculative investments, many of which had not existed during prior economic pullbacks. Unlike prior market pullbacks and recessions the destruction of these “alternative” asset classes were not as visible nor as “married” to public market index performances. As an example the collective meltdown in crypto, NFTs, SPACs, and “meme” coins/stocks were not experienced as widely by traditional institutional investors in the pullback from EOY 2021–2023. That being said, the economic impact was felt nonetheless by every day people and retail investors.
For context a 2023 research report by Bank of International Settlements estimated that from November 2021's peak through November of 2022 more than $1.8 trillion of crypto value had been destroyed of which $450 billion vanished during the Terra/Luna collapse and following FTX’s bankruptcy. According to a separate research report by CoinGeko, NFTs shed more than $14.5b in value since 2022. Forbes recently published an article related to the 2021 SPAC craze, which was also estimated to have resulted in more than $100b in investor losses from 2021–2024. Separately, according to Investor’s Business Daily the collective basket of “meme” stocks, which had peaked on February 9th 2021 had also lost $191 billion in collective value less than a year later. Though certain cryptocurrencies have since recovered the cumulative destruction of capital from the aforementioned items had sucked an estimated $2 trillion dollars of liquidity out of the broader market by late 2022.
The destruction of capital cited above was another reason for me to believe that the market was nearing a “bottom” by late 2022 and that the true economic pullback had been more significant than what was being widely reported. Furthermore, inflation had also played a role in masking the economic downturn of EOY 2021–2023. During inflationary periods companies can leverage “pricing power” to offset declines in topline growth. By increasing pricing these different enterprises are able to combat and mask what would otherwise be anemic and or declining growth.
The destruction of newer asset classes in conjunction with inflation led me to believe that the most volatile period of this pullback was actually in the rearview mirror.
The above five reasons drove me to begin accumulating meaningful positions in targeted securities throughout mid to end of 2022 as well as during early 2023. The result is that my portfolio grew by +70% in less than a year.
What Comes Next?
The S&P 500 is currently priced above historical averages. Over the longterm (i.e. since 1871) the S&P 500 has traded at an average TTM P/E ratio of 23.97x. The S&P 500 is currently trading at 29x, which is well above the historical average.
I personally would not recommend and do not intend to purchase any securities in the near term unless they are value oriented and cash generative assets. Public valuations are far too frothy and I would recommend waiting for at least a broader 10% pullback across the S&P 500 and NASDAQ before making any new investments.
The recent run-up in public securities is based on the supposition that inflation will completely subside and that a new period of quantitative easing will come to the rescue by this summer. Unfortunately, times like these make investing in public equities based on fundamentals less attractive as “macro” economic events seem to be driving valuations. There are several other macro economic variables, which could drive market volatility, and in turn, create buying opportunities in the coming months. These variables may include: persistent inflation, geopolitical escalation in the pacific, and most notably, the election cycle. For this reason I am sitting on the sidelines and slowly building up my liquidity. In conjunction I am building hedges on certain securities that have garnered outsized gains in 2023 and early 2024.
If you’ve made it this far I applaud you. Thanks for reading!
Author Bio — In 2019 I sold my company Solace Technologies for $16.25m to (NYSE: TPB). I have started and invested in a number of other private companies. Currently, some of my favorite private sector investments include: Charge Fuze, ActionResponder, Carro and Fazit.
Currently, I am the Chief of Strategy at Turning Point Brands (NYSE: TPB) where we are focusing on building a world class CPG business for tomorrow’s brands.
I also co-founded the Advertising, Market Research and Branding Agency DPGW in 2013, which has worked with businesses ranging from startups to fortune 500 companies on brand development, advertising and market research.
To learn more or to reach out to me directly visit www.lorenzodeplano.com and subscribe.
Disclaimer — Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above are purely subjective and reflect the opinions of the author only. The author is not a licensed securities dealer, broker or US investment adviser or investment bank. Invest at your own risk.
